Paper Title: Islamic Financial Inclusion and Economic Growth in OIC Countries: Panel Quantile Regression Analysis

Author:        Massinissa Ameziane

Publisher:     Journal of Islamic Monetary Economics and Finance, Vol 10(3), 609 – 630.

This study examines how Islamic financial inclusion contributes to economic growth within the OIC countries. A novel index of Islamic financial inclusion (IIFI) is developed and a quantile regression with fixed effects approach is applied to data spanning the period 2015 to 2020 in 25 OIC countries. The index has been constructed to measure the level of financial inclusion within the OIC countries taking into consideration the access to traditional, digital and Islamic financial services.

The findings reveal that Islamic financial inclusion contributes positively to economic growth in the OIC countries across different segments of the GDP per capita with the impact being consistent across all segments. Specifically, a one- percent increase in the index of Islamic Financial Inclusion (IIFI) is associated with a 0.669% rise in GDP per capita.

This underscores the importance of promoting Islamic financial inclusion as a key strategy for driving economic development across OIC member states, particularly for lower IIFI countries that exhibit greater scope for improvement.

The authors argue that by expanding the network of Islamic banks and enhancing the technological infrastructure for financial access, policymakers can harness the transformative potential of Islamic finance to promote sustainable economic growth and development in the OIC countries. The authors urge policymakers to prioritize initiatives aimed at expanding the network of Islamic banks and enhancing technological infrastructure for financial access.

Measures such as promoting digital payment systems, improving internet connectivity and fostering innovation in financial technology can amplify the impact of Islamic finance on economic growth. Additionally, establishing regulatory frameworks conducive to digital Islamic financial services is crucial for creating a supportive environment.

Authors also note that while finance is crucial for economic growth, a significant proportion of individuals and businesses in developing countries are financially underserved. In OIC countries, there is financial exclusion due to involuntary as well as voluntary factors. Muslims want to avoid Riba which is Haram. In the absence of Islamic banking, they may not bank not because they are not bankable clients, but the banks are not Islamic enough.

By and large, the literature reveals positive effect of financial inclusion. Hence, if Islamic banking enhances financial inclusion, then it will have positive effect on growth. However, it is important to also look at bi-directional causality. Usually, growth increases per capita income and savings. Increase in savings will lead to more deposits and investments in Islamic banks. Is the financial inclusion driving growth or the growth driving financial inclusion?

The authors note themselves that conducting comparative studies between Islamic and conventional financial systems could highlight the unique advantages  and  challenges  of  each, providing a nuanced view of their respective contributions to economic growth. Additionally, qualitative case studies of individual OIC countries could uncover contextual factors and unique pathways through which Islamic financial inclusion influences economic growth.

Furthermore, it is important to question financial inclusion for whom? Merely looking at the aggregate size of market and not the parts which make up the whole may blur the reality. Is the financial inclusion really financial inclusion of masses or is it driven by large institutional investments in the periods of growth.

Furthermore, is the financial inclusion impacting the very people and their incomes or is their inclusion fuels growth of the large corporate sector. Is the effect trickling down or trickling up? This can be explored through primary data of panels using pre and post financial inclusion welfare indicators.